It is always amazing to me that so many people view the government as a reasonable fix for perceived failures in private accountability systems. Government officials are the worst about avoiding accountability.

Update: The point that Basel II/III has big discrete jumps in capital requirements for small shifts in bond ratings is a reasonable observations. Smoothing this out makes sense, but there is more than this that needs to be fixed in the Basel requirements (particularly the now largely dated idea that any assets are "risk-free"), which played a huge but largely unsung role in inflating the demand in the last decade for AAA rated mortgage bonds.

well, when half your bonds are going to be junk in 2 years, you need to stop looking at ratings so you can pretend they are valid collateral for the ECB.

Don

Great! Can I tell the banker to not look at my credit history/credit score next time I ask for a loan? Would make money much easier to get and way cheaper!

"Ignore the man behind the curtain!"

http://dullgeek.blogspot.com dullgeek

Hmmm.. the EU can make it illegal for credit ratings agencies to be in existence in Europe, I suppose. But I think they're going to have a hard time preventing US credit ratings agencies from assessing the value of the bonds that EU countries wish to issue. And I think they're going to have an even harder time getting bond purchasers to ignore those non-EU ratings agencies.

And if, by some miracle, they manage to do both, it would seem to me that the reaction of bond purchasers will be to just not purchase the bonds. What's next? Making it illegal to demand a bond at a higher interest rate? Making it illegal to *not* purchase bonds?

TXJim

This is just the latest example of how central banks have to resort to more blatant attempts to explain away reality. The whole risk mgmt world is corrupted and most investors know it. The ratings agencies have been part of the shell game for years so it really isn't a big deal if the EU bums ignore them. Central banks will just buy the bonds from their primary dealers who bought them from the treasury. Usually only hours apart. The PD's get a bit of vig off the top and the Fed/ECB get to say they are not monetizing debt. Like our most recent bond auction. Debt monetization. It is a fraud, pure and simple.

Bond vigilantes? Ha! The people who used to have the power to force market accountability have long ago been co-opted by soveriegns and their central banks. Unfortunately most people are forced to keep their "retirement" accounts under managment of these co-opted entities and it is they who are using our cash to help perpetuate the shell game. Amazingly, John Corzine is still a free man.

Mesa Econoguy

The only ratings which matter are ECB an Fed ratings, when previous AAA-rated paper goes to junk, and they accept it as collateral.